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Greek bond swings more mirage than market

Fri, Aug 21, 2015 - 11:34 PM

[LONDON] From afar, it looked like finally some good news for Greek markets as returns on government bonds beat European peers. Close up, most investors won't touch them.

The biggest fund managers know that trading volume still is too low for them to buy or sell without buffeting prices. The quotes by banks, showing a 46 per cent return in the third quarter, reflect perceptions of political deals over Greece's debt more than the nation's ability to avoid default by implementing the economic measures as part of its bailout.

"Greece is important to us in as much as it is a proverbial canary in a European bond-market coal mine," said Mark Dowding, partner and money manager at BlueBay Asset Management LLP in London, which oversees US$62 billion. "We don't like Greece's track record on reforms, and have no plan to buy its bonds at this point." Prime Minister Alexis Tsipras on Thursday announced he will step down with an eye to snap elections, a move the embattled leader will likely use to try to shut out dissenters and return to power with a more manageable coalition. It will be Greece's second election this year.

After months of high drama and a near meltdown of its financial system, the euro region's most-indebted nation had just managed to agree with its European creditors to secure a third rescue, valued at 86 billion euros ($97 billion).

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The return on Greek bonds this quarter through Aug 20 followed a 26 per cent loss in the first six months, according to Bloomberg World Bond Indexes. It brought the year-to-date return to 8 percent, compared with 2.5 per cent from Italy's bonds and 0.9 per cent from Germany's.

News of another impending vote showed how sensitive the market is. Greek bonds extended declines and Spanish and Italian debt erased earlier gains on Thursday. The yield on 10-year Greek government securities rose 51 basis points to 10.06 per cent, the highest in a week, on Friday as of 1.10 pm in London.

Those few fund managers who took the risk may have reaped a gain. Michael Krautzberger, head of euro fixed-income at BlackRock International Ltd., said in July that some of the company's total-return accounts bought a "tiny" amount of Greek bonds. BlackRock has since sold most of them, according to a person familiar with the decision who asked not to be named because the transaction was confidential.

Mr Tsipras is likely to again win the elections and a more stable government will make reforms more credible, according to Rene Albrecht, an analyst at DZ Bank AG in Frankfurt. This development should support most euro-region bonds - except those of Greece, he said.

"Things are definitely looking better in the short term," Cosimo Marasciulo, head of government bonds at Pioneer Investments, which oversees US$242 billion, said before Tsipras's announcement. "But there are still some big hurdles to get over." Take state asset sales. In 2011, under Greece's first bailout plan, 50 billion euros was to have been raised by 2015 through privatization of public companies and real estate. Only 7.7 billion euros in sales have been agreed so far, according to data from Hellenic Republic Asset Development Fund.

Then there's the debt burden, which Tsipras's government and International Monetary Fund officials have said is unsustainable. With an economic slump crippling tax revenue, the debt-to-gross domestic product ratio could rise toward 200 percent, according to an IMF forecast in July. By comparison, most advanced economies are well under 100 percent.

"The country is insolvent," said John Anderson, a money manager at Smith & Williamson, an investment company with the equivalent of $25 billion of assets. "Investment in Greek bonds is a political play, not a financial one."